Bank capital, margining and the return of FX
The week on Risk.net, December 12–18
How buy-to-hold accounting shuffle boosts US bank capital
Banks gamble shrinking AFS portfolios will bring down stress capital buffer, G-Sib surcharge
Margin rules snare FX options users
US banks forced to post margin on ‘naked’ trades, with buy-side firms soon to follow
Markets search for FX factor as rates fall flat
Traders signal shift to currency strategies, but is it passing fad or permanent fixture?
COMMENTARY: FX marks the spot
Rates investors have had a tough time over the past year. Interest rates were already at chronic lows following the 2008 financial crisis, before the shock of the coronavirus forced central banks into emergency action once again to prop up enfeebled economies.
With rates at or near – or even below – zero, investors are struggling to find suitable trading opportunities to express a short-term view on the market.
Some have suggested rates products can no longer function as a ‘release valve’ for investors to make trades that relieve pressure from market imbalances. So firms are looking at other asset classes, and foreign exchange is in their sights.
Most asset managers and pension funds use FX for prosaic purposes: mainly to hedge currency exposure within their portfolios. They haven’t, in recent times at least, made much use of the asset class for speculation or to generate alpha.
That appears to be changing. Investors such as Aberdeen Standard Investments and UBS Asset Management are exploring more currency-specific strategies. They see shifts in market fundamentals, such as a weakening US dollar and greater investment in emerging markets, as helping to support these types of trades.
The change won’t happen overnight – and probably won’t suit fast-money investors. But, whisper it quietly, FX could be about to restore some X-factor to investors labouring in a depressed rates environment.
STAT OF THE WEEK
Seesawing equity markets have proved troublesome for trend-following investors. These strategies were down 8% during the Covid crisis in March and April, and continued to fall during the next six months, according to data from PremiaLab. The problem, experts say, is that equities were zigzagging too fast for the algos to catch up. Here’s hoping for a more sedate 2021.
QUOTE OF THE WEEK
“It is fundamental that in the very next months, benchmark administrators in the EU will be able to regularly publish an €STR forward-looking term structure so that it can be used as a Euribor fallback rate” – Steven Maijoor, Esma, commenting on poor liquidity in €STR derivatives markets
Further reading
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on 7 days in 60 seconds
Hedge fund losses, CLS and a capital floor
The week on Risk.net, December 5–11
Capital buffers, contingent hedges and USD Libor
The week on Risk.net, November 28–December 4
SA-CCR, SOFR lending and model approval
The week on Risk.net, November 21-27, 2020
Fallbacks, Libor and the cultural risks of lockdown
The week on Risk.net, November 14-20, 2020
Climate risk, fixing Libor and tough times for US G-Sibs
The week on Risk.net, November 7-13, 2020
FVA pain, ethical hedging and a degraded copy of Trace
The week on Risk.net, October 31–November 6, 2020
Basis traders, prime brokers and election risk
The week on Risk.net, October 24-30, 2020
Covid bank tests, swap fix deferred and SOFR switch
The week on Risk.net, October 17-23, 2020